Microsoft tablet expansion may be ill-timed

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Microsoft Corp. is expected Tuesday to expand its 18-month-old line of tablet computers. The company's timing isn't good.

Growth in tablet sales has slowed to a crawl, sparking debate about whether popularity of the devices has crested. Microsoft also must decide how to manage two tablet-making groups, its own money-losing Surface lineup and another it inherited in April's acquisition of Nokia Corp.

At an event Tuesday in New York, Microsoft plans to introduce new or updated tablets, according to people familiar with the matter. Microsoft had been developing a smaller tablet, similar in size to Apple Inc.'s 7.9-inch iPad Mini, but it is unclear whether the company is going ahead with the device, some of these people said. The Surface screen is 10.6 inches diagonally, about an inch smaller than Apple's iPad Air.

Microsoft has struggled to grab a foothold in mobile gadgetry. Tablets powered by Microsoft's Windows software, including the Surface, accounted for fewer than 4% of tablets sold world-wide last year, according to research firm IDC.

Microsoft Chief Executive Satya Nadella has made mobile a key strategy objective, but Tuesday's event will spotlight the absence of quick fixes. A Microsoft spokesman declined to comment ahead of the event.

"That's definitely been an eye opener, some of the slowdowns we've seen in the tablet market," said Daniel Ives, an analyst with FBR Capital Markets. "Microsoft, they have no choice. They have to drive whatever share gains they can in the tablet market."

Microsoft had a tough first foray into homegrown computing devices, with the launch of the Surface in October 2012. To date, Microsoft has recorded about $2.64 billion in Surface sales. By comparison, Apple sold $7.6 billion worth of iPads in the quarter ended March 29. Nomura Securities estimates Microsoft has racked up roughly $2 billion in cumulative operating losses on the Surface devices.

The struggle in part reflects Microsoft's misjudgment of the tablet market, say analysts and people familiar with the company's strategy. At the moment it introduced the Surface with a 10.6-inch screen, new tablet types with seven-to-eight-inch screens took off in popularity. Since late 2012, research firms say smaller tablets have been an important pocket of growth.

Now, it isn't just the Surface that is wheezing. Tablet sales rose 3.9% in the first quarter from the same period a year ago, according to IDC. The growth rate was down sharply from a year earlier, when tablet-unit sales more than doubled from the prior year.

Apple undoubtedly accounts for much of the slowdown. It makes about one-third of tablets and hasn't dramatically updated the iPad recently. Plus, Apple said its first-quarter sales suffered in comparison to last year, when a prior inventory buildup helped sales.

But some in the technology industry wonder whether tablets are nearing their limits. IDC said businesses and consumers are holding on to tablets longer, and using larger-screen smartphones for some tasks they might have done on a tablet.

"Just as laptops chewed away desktop share, tablets will chew away at laptop share. But it is the smartphone that is the new transformative device," said Benedict Evans, a partner with venture-capital firm Andreessen Horowitz.

Apple Chief Executive Tim Cook told investors last month that Apple believes "the tablet market will surpass the PC market in size within the next few years, and we believe that Apple will be a major beneficiary of this trend."

Some investors think Microsoft is making a mistake by making its own tablets and smartphones. Mr. Nadella, the CEO since February, hasn't yet articulated how making its own tablets and mobile phones will help Microsoft, especially if its market share of devices remains very small.

Mr. Nadella also has to grapple with two mobile-hardware teams. Nokia has sold its own tablet, similar to the Surface, called the Lumia 2520, spearheaded by the Finnish company's mobile-hardware development team in San Diego. Nokia also had discussed a smaller tablet with Qualcomm Inc., maker of chips used in many smartphones and tablets, according to people familiar with the matter.

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